1.Consider portfolios that can be formed using the stock X and Y with the necessary information in the following table. The risk-free rate is 1%. Determine the Sharpe ratio of the portfolio with the weight of 0.6 on X and 0.4 on Y.
RETURN ON X (%). RETURN ON Y (%) | |
MEAN | 6 10 |
STANDARD DEVIATION | 8 12 |
CORRELATION | 0.2 |
Expected return of portfolio = (60% × 6%) + (40% × 10%)
= 3.60% + 4.00%
= 7.60%
Expected return of portfolio is 7.60%.
Now, Sharpe ratio = (Portfolio Return - Risk free rate) / Standard deviation
= (7.60% - 1%) / 7.44%
= 6.60% / 7.44%
= 0.89
Sharpe ratio is 0.89.
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